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Rackspace Hosting Inc. Stock Buy Recommendation Reiterated (RAX)

Editor's Note: TheStreet ratings do not represent the views of TheStreet's staff or its contributors. Ratings are established by computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model.

NEW YORK (TheStreet) -- Rackspace Hosting (NYSE:RAX) has been reiterated by TheStreet Ratings as a buy with a ratings score of B . The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, robust revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.

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Highlights from the ratings report include:

  • RACKSPACE HOSTING INC has improved earnings per share by 16.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, RACKSPACE HOSTING INC increased its bottom line by earning $0.75 versus $0.55 in the prior year. This year, the market expects an improvement in earnings ($0.99 versus $0.75).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Internet Software & Services industry average. The net income increased by 19.4% when compared to the same quarter one year prior, going from $25.05 million to $29.91 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 33.5%. Since the same quarter one year prior, revenues rose by 24.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Although RAX's debt-to-equity ratio of 0.15 is very low, it is currently higher than that of the industry average. To add to this, RAX has a quick ratio of 1.51, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for RACKSPACE HOSTING INC is currently very high, coming in at 73.00%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, RAX's net profit margin of 8.47% significantly trails the industry average.

Rackspace Hosting, Inc. provides cloud computing services, managing Web-based IT systems for small and medium-sized businesses, and large enterprises worldwide. Rackspace Hosting has a market cap of $7.54 billion and is part of the technology sector and computer software & services industry. The company has a P/E ratio of 73.4, above the S&P 500 P/E ratio of 17.7. Shares are down 25.8% year to date as of the close of trading on Wednesday.

You can view the full Rackspace Hosting Ratings Report or get investment ideas from our investment research center.

--Written by a member of TheStreet Ratings Staff.

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